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Wright Medical to Restructure

Zacks Equity Research

International orthopedic devices company  Wright Medical Group (NasdaqGS: WMGI - News) recently reported that it is exercising a cost restructuring initiative to improve profitability, promote growth and strengthen cash flow, leading to enhanced shareholder value. The company believes that the early phase of this project will be concluded over the upcoming 9 months to be followed by more efficiency drives from 2012 onwards.

According to Wright Medical Group, the restructuring initiative will lead to a more cost efficient enterprise, which will boost earnings in 2012. Furthermore, with a robust balance sheet, the company is well positioned to engage in further acquisitions. 

As per the plan, Wright Medical Group has launched several measures to curtail expenditure, including cutting down the range of its overseas product offering, streamlining its R&D efforts and fine tuning factory operations to be in tandem with mix/volume forecasts. Overall, Wright Medical Group intends to implement a 6% cut in its staffing, which translates to about 80 employees. It has already informed the concerned staff.

The plan seeks to create annual operational efficiency which will strengthen Wright Medical Group’s fiscal performance from 2012 onwards while generating investments for long-term growth. The company forecasts that the current initiative will positively impact adjusted earnings per share by about 5 to 6 cents in fiscal 2012 with a positive annual effect of about 8 cents after that. Wright Medical Group’s adjusted earnings per share do not include expenses related to the restructuring plan and other extraordinary or one-time expenses. 

Wright Medical Group anticipates that it will incur pre-tax charges, on account of the cost restructuring initiative, in a band of $25 million and $30 million, including $6 million to $8 million of non-cash expenses. The major portion of these charges should be accounted for in the third and fourth quarters of 2011 with some more charges to be incurred in the first half of 2012.

Wright Medical Group is a global orthopedic devices company specializing in the development and marketing of reconstructive joint devices and bio-orthopedic materials. It is a leader in the U.S. market for foot and ankle surgical products. The company retains its strength in the niche extremities segment.

We feel future revenue growth will be supported by new product (including internally developed and those from acquisitions) launches. During second-quarter 2011, Wright Medical announced the commercial launch of new products for the foot and ankle market including the INBONE II total ankle replacement system. Moreover, new deals in extremities, Wright Medical’s fastest growing segment, are expected to bolster growth in this business. Within extremities, foot and ankle products are expected to be a major growth driver.

However, our views are moderated by lingering compliance issues and intense competition from larger orthopedic players. Wright Medical competes with much larger players such as Zimmer Holdings (NYSE: ZMH - News), Stryker (NYSE: SYK - News), Johnson & Johnson’s (NYSE: JNJ - News) De Puy and Smith & Nephew (NYSE: SNN - News). Moreover, the company remains exposed to pricing/procedure volume headwinds. We currently have a long-term Neutral recommendation on the stock, backed by a short-term Zacks #3 Rank (Hold).

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